Creditors file suit against former Kmart executives

Thursday, November 20, 2003

The Associated Press

DETROIT -- Six former Kmart executives billed the company for nannies, luxury cars and private chauffeurs even as the discount chain was fighting a losing battle against bankruptcy, creditors say in a lawsuit.

The lawsuit filed Tuesday by the Kmart Creditor Trust alleges former chief executive and chairman Chuck Conaway, former president Mark Schwartz and four others charged Kmart more than $1 billion in personal expenses.

Conaway allegedly billed Kmart $106,191 for improvements to his home, including $34,948 for a guard house. He had two company-issued Jaguars, plus a Lincoln Navigator and a driver to take his children to school.

The lawsuit accuses the defendants of engaging "in a pattern of corporate waste at a time when, to say the least, Kmart could ill afford it."

The lawsuit also alleges the executives concealed Kmart's deteriorating condition from the board of directors.

"Conaway repeatedly indicated that Kmart was on the rebound and that success was just around the corner. In fact, the opposite was true," the lawsuit says. "Even as Kmart was collapsing, Conaway, Schwartz, and the remaining individual defendants took numerous opportunities to enrich themselves and their cronies, all at the expense of Kmart."

The lawsuit cites management mistakes such as the "BlueLight Always" program Conaway and Schwartz unveiled in 2001 in an attempt to compete against Wal-Mart. The campaign was supposed to drop prices on the most frequently purchased items, but it failed in part because of Kmart's poor distribution system.

The creditor trust was set up in April to recoup money for creditors who lost billions when Kmart filed for Chapter 11 bankruptcy protection in January 2002. The bankruptcy filing resulted in the closing of about 600 stores, cost 57,000 Kmart employees their jobs and canceled Kmart's stock.

The trust sued six other former executives in September to recoup millions in loans given to them weeks before Kmart filed for bankruptcy.

Kmart Holding Corp., as the company now is called, "is not involved in either the pursuit of these individuals or in legal action initiated by the creditor trust against other companies," spokesman Jack Ferry said.

The lawsuit also names PricewaterhouseCoopers, Kmart's accounting company from 1993 until last month, accusing it of negligence. PricewaterhouseCoopers spokesman Steven Silber declined comment.

None of the executives named in the lawsuit has been accused of criminal wrongdoing, but a federal investigation of the company's collapse is under way.

Earlier this month, charges against two former Kmart executives accused of falsifying the company's books were dropped by prosecutors for lack of evidence.